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Final Repair Regulations Released
The Internal Revenue Service released the long-anticipated regulations on whether or when a taxpayer must capitalize expenditures related to tangible assets. These final regulations generally follow the temporary regulations the Internal Revenue Service issued in 2011. However, certain provisions of the temporary regulations had significant changes in the final version and will need to be reviewed in more depth by taxpayers.
Proposed regulations dealing with general asset accounts and dispositions (recognition of gain or loss) were also issued along with the final capitalization regulations.
The key elements in the final capitalization regulations as changed from the temporary regulations along with the general asset account and dispositions proposed regulations are:
- A building and its structural components are now one asset for disposition purposes
- General Asset Accounts not required to have ability to choose loss recognition on asset, or portion of an asset disposition
- New safe harbor for expenditures by small taxpayers for qualified real property
- De minimis rule for materials and supplies for taxpayers with applicable financial statements capped at $5,000 per invoice or individual item
- De minimis rule for materials and supplies for taxpayers without applicable financial statements capped at $500 per invoice or individual item
- Routine maintenance safe harbor now applicable to buildings
- Discrete and critical function relating to the improvement standards only applies to major components
- Materials and supplies definition was increased to $200 from $100
Based on the information contained in temporary and final regulations, an election to change one or more tax accounting methods will be required by most business taxpayers.
Effective Date
The final regulations are effective for tax years beginning on or after Jan. 1, 2014, and for certain provisions, to costs incurred on or after Jan. 1, 2014. Although mandatory for 2014, the regulations allow taxpayers to early adopt these rules back to 2012. The regulations also allow taxpayers to use or continue to use the prior temporary regulations for the tax years beginning on or after Jan. 1, 2012. However, taxpayers cannot rely on the temporary regulations for tax years beginning on or after Jan. 1, 2014. The proposed general asset and disposition regulations when finalized are expected to be effective for tax years beginning on or after Jan. 1, 2014, but may be adopted, as allowed, back to 2012.
Choosing for 2013
While the final regulations are not mandatory until 2014, in 2013 taxpayers can choose to continue to use their old approach to capitalization of tangible property, use the rules contained in the prior temporary regulations, or early adopt the final regulations. The optimal choice will depend on your specific facts and circumstances.
The final regulations continue to be reviewed. Expect additional, more in-depth coverage and training opportunities in the coming weeks and months. Eide Bailly is hosting a number of free workshops in the upcoming weeks. Visit our events page to learn more or contact your Eide Bailly representative with questions for additional information. |
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Eide Bailly's National Tax Office serves as a resource for clients to help analyze complex tax issues related to business decisions. Our professionals are committed to helping clients stay informed about tax news, developments and trends through various specialty areas, including cost segregation studies, wealth transfer, state and local taxation, international tax, tax exempt organizations and tax legislation. |
